Private Investment, a Solution to Water & Sanitation Challenges in Latin America & the Caribbean

COVID-19 has presented an additional challenge to the expansion of water and sanitation access in the region, with a reduction in related investments; public-private partnerships and other resources such as access to local currency financing are expected to help expand private investment in the sector.

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Our region faces access challenges when it comes to water and sanitation (W&S), and a significant need for investment in infrastructure. In this context, it's to be expected that the solution comes through public-private partnerships (PPP) with a relevant role in boosting the sector.

According to IDB data, with the current level of investment, Latin America and the Caribbean (LAC) will not be able to meet the UN Sustainable Development Goal number 6 – "Ensure availability and sustainable management of water and sanitation for all" – until 2100. COVID-19 has underlined the importance of tackling this problem.

According to a study conducted this year by IDB Invest's advisory services area, LAC's challenges are particularly important with regard to waste-water collection and treatment. The takeaway is that infrastructure shortcomings in the region help to accelerate the transmission of COVID-19 in vulnerable populations, given that the World Health Organization has indicated that one of the most effective solutions to stop the disease is access to clean water for hand washing, as well as efficient sanitation systems.

To reduce the gap and increase access to efficient W&S infrastructure, current investments should be doubled, requiring more private sector participation. However, the number of projects in the W&S sector that have a private component decreased by around 40% in LAC in the 2015-2019 period, compared to the previous five-year period, and fell by more than half if we exclude Brazil, the regional economy where more emphasis has been placed on these investments.

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In this context, well-structured PPP, with a balanced risk allocation and with adequate bankable requirements, have been successful in attracting private capital and developing other sectors: especially transport infrastructures such as ports and highways, but also transmission and renewable energy. This represents a valuable precedent to follow at W&S.

To achieve more and better PPP in this sector, we need to increase collaboration with public institutions, and clarify the possible perception that these structures may result in “privatization”, which is not the case since asset ownership does not revert to the private sector. Given this situation, it's possible that a greater dissemination of the benefits of identifying, structuring and contracting W&S projects under PPP schemes and structures is necessary, as the Brazilian government, a pioneer in this field, already does. On the other hand, a solid technical and financial feasibility analysis is key in determining which specific projects should be structured under PPP.

In line with the above, operators and financiers active in the region have a great interest in this market, but many find it difficult to find opportunities. This indicates a need to structure more PPP projects in the region to generate a more important portfolio of projects and generate efficiencies, synergies, and more investment and private liquidity.


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Financing that is well adapted to the characteristics of the sector/project is also key. In our experience, a great incentive to attract private capital lies in the flexibility of debt instruments, such as financing in local currency or longer grace and financing periods adapted to each sector and adjusted to the investment period. This is particularly important in W&S projects, which are structured on the basis of projections of increased users and wider use of services, and in many cases, precisely for that reason, have several investment cycles during the concession period.

Recent deals such as the IDB Group financing for R$442 million with a total term of 20 years to BRK Ambiental, the largest private sanitation company in Brazil, and whose majority shareholder is the Canadian Brookfield fund, are an example.

In this project, IDB Group financing is being used for the expansion, rehabilitation and improvement of infrastructure works for waste-water in 15 municipalities of the metropolitan region of Recife (corresponding to the second investment cycle of this concession) and will benefit a population with high economic vulnerability, increasing access to waste-water sanitation to 90% from 33% of the population currently.

These are projects that, by lowering infant illnesses, have clear benefits for everyone's lives, particularly women, who tend to take care of those sick children. That is why IDB Invest has set itself the goal of being the leading development bank in financing sustainable infrastructure in the W&S sector.

 

Authors

Denis Leduc

Denis is an Investment Consultant, Advisory Services and Blended Finance Team at IDB Invest, which he joined in 2019. He is responsible for providing

Rafael Matas

Rafael is a Lead Investment Officer, Infrastructure at IDB Invest, which he joined in 2016. He is responsible for originating and structuring finan

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